The Demand for Government Debt

Abstract

We document that the sectoral composition and marginal buyers of government debt differ notably across jurisdictions and over time. For the United States, we use instrumental variables derived from monetary policy surprises to estimate the demand elasticities of various sectors. Commercial banks and mutual funds exhibit the most price-elastic demand, while the foreign official sector has a price-inelastic demand. Using these estimates, we find that a 1% increase in the central bank holdings of US Treasuries results in a 8-13 basis point drop in long-term yields. Elasticities of individual sectors do not differ in a statistically significant manner when the central bank share in the Treasury market increases or decreases. However, different market compositions during various QE and QT programs have led to an asymmetric effect with the impact of QE on yields being greater than that of QT. Our results suggest that the aggregate demand for US Treasuries is considerably more elastic than the markets for equities, corporate bonds and emerging market sovereign bonds. In counterfactual analyses, we estimate the total price impact of various QE and QT programs with different market compositions, the individual role of each sector in driving the total impact of QE and QT programs, and the potential divestment of some reserve managers of US Treasuries. 

Keywords: Government Debt, Demand, Yield Elasticity, Quantitative Easing, Quantitative Tightening

JEL Classification: E58, G11, G21, G23, H63